EX-99.1 3 dex991.htm NEWS RELEASE Prepared by R.R. Donnelley Financial -- NEWS RELEASE
Exhibit 99.1
News Release
[LOGO OF MELLON]
 
MEDIA:
  
ANALYSTS:
  
Corporate Affairs
Ken Herz
  
Steve Lackey
  
One Mellon Center
(412) 234-0850
  
(412) 234-5601
  
Pittsburgh, PA 15258-0001
Ron Sommer
  
Andy Clark
    
(412) 236-0082
  
(412) 234-4633
    
 
FOR IMMEDIATE RELEASE
 
MELLON’S SECOND-QUARTER RESULTS REFLECT SOLID CORE BUSINESS
SECTORS PERFORMANCE, SPECIAL LOAN LOSS PROVISION
— Contribution to EPS from core sectors up 5% compared to second quarter of 2001 —
 
PITTSBURGH, July 16, 2002—Mellon Financial Corporation (NYSE: MEL) today announced second quarter 2002 net income of $109 million, or 25 cents per share, and income from continuing operations of $106 million, or 24 cents per share. These results included a special provision for credit losses of 23 cents per share associated in large part with credit exposure related to customers that have been associated with recent allegations of accounting irregularities. Income from continuing operations totaled $211 million, or 47 cents per share, in the first quarter of 2002, and $118 million, or 25 cents per share, in the second quarter of 2001.
 
Results in the second quarter of 2002 reflect the weakness in the economy and the equity markets that has been exacerbated by a lack of investor confidence. The equity markets at June 30, 2002, as measured by the Standard and Poor’s 500 Index, decreased 13.7 percent compared with March 31, 2002 and decreased 19.2 percent compared with June 30, 2001. However, despite the negative economic and equity market factors, the Corporation’s core business sectors continue to perform well. Core business sector net income of $201 million, which excludes non-core sector activity and the special provision for credit losses, was $1 million higher than in the first quarter of 2002 but down from $207 million in the second quarter of 2001 reflecting the weaker equity and foreign exchange markets. Core business sectors’ contribution to earnings per share of 45 cents per share was equal to the first quarter of 2002 and up 5 percent compared to the second quarter of 2001, despite lower net income, as lower average diluted shares more than offset the impact of weaker markets.
 
Financial Highlights
   
Quarter ended
     
Six months ended
  
(dollar amounts in millions, except per share
amounts; returns are annualized)
   
June 30,
2002
   
March 31,
2002
   
June 30, 2001(a)
     
June 30,
2002
   
June 30,
2001 (a)
  
Continuing operations:
                             
Diluted earnings per share
   
$.24
   
$.47
   
$.25
 
   
$.71
   
$.69
 
Income from continuing operations
   
$106
   
$211
   
$118
 
   
$317
   
$334
 
Return on equity
   
12.6%
   
24.8%
   
12.8%
 
   
18.8%
   
17.5%
 
Net income:
                             
Diluted earnings per share
   
$.25
   
$.48
   
$.17
 
   
$.73
   
$.76
 
Net income
   
$109
   
$216
   
$79
 
   
$325
   
$370
 
Return on equity
   
13.0%
   
25.4%
   
8.5%
 
   
19.3%
   
19.3%
 
Fee revenue as a percentage of fee and net interest revenue (FTE)
   
86%
   
86%
   
85%
(b)
   
86%
   
85%
(b)
Trust and investment fee revenue as a percentage of fee and net interest revenue (FTE)
   
70%
   
70%
   
68%
(b)
   
70%
   
67%
(b)
Efficiency ratio
   
70%
   
70%
   
65%
(b)
   
70%
   
65%
(b)
S&P 500 Index at period end
   
990
   
1,147
   
1,224
 
            
(a)
 
Results for the second quarter and first six months of 2001 exclude the after-tax impact of the amortization of goodwill from purchase acquisitions of $16 million, or 4 cents per share and $33 million, or 7 cents per share, respectively for continuing operations, and $24 million, or 5 cents per share and $51 million, or 10 cents per share, respectively, on a net income basis. See page 20 for additional information.
(b)
 
Ratios were calculated excluding the venture capital fair market value adjustments shown in the table on page 19.

Mellon Reports Earnings
July 16, 2002
Page 2
 
“I am pleased that our core business sectors continue to perform reasonably well and that earnings excluding the special provision met Street expectations, but believe the special provision for credit exposure is appropriate in view of the continuing difficult and uncertain environment,” said Martin G. McGuinn, Mellon chairman and chief executive officer. “The key elements of our long-term strategy—a growing and balanced array of asset management and corporate and institutional services businesses—are consistent with our fundamental strengths as a company and over the long term will deliver superior returns to our shareholders.
 
“In view of the current crisis of confidence in business, I want to state unequivocally that we are committed to the highest standards of comprehensive and transparent financial disclosure. Management well understands its responsibility to report our results accurately,” Mr. McGuinn added.
 
The Corporation also declared a quarterly common stock dividend of 12 cents per share. This cash dividend is payable on Thursday, August 15, 2002, to shareholders of record at the close of business on Wednesday, July 31, 2002.
 
As a result of several previously completed significant divestitures discussed further on page 19, the Corporation is reporting its financial results using the discontinued operations method of accounting. In accordance with generally accepted accounting principles, earnings, assets and liabilities of the discontinued businesses are shown separately in the income statement and balance sheet, respectively, for all periods presented. Accordingly, all information in this earnings release, including all supplemental information, reflects continuing operations unless otherwise noted.
 
Second Quarter 2002 Financial Data—Continuing Operations:
 
As discussed on page 20, amortization of goodwill was discontinued in January 2002. For comparability purposes, income statement and related ratio comparisons exclude goodwill amortization in 2001.
 
 
•
 
The contribution of the Corporation’s core business sectors to earnings per share was unchanged compared with the first quarter of 2002, and increased 5 percent over the second quarter of 2001.
 
 
•
 
Return on equity totaled 12.6 percent in the second quarter of 2002. Excluding the special provision for credit losses, return on equity totaled 24.6 percent, compared with 24.8 percent in the first quarter of 2002 and 22.5 percent in the second quarter of 2001, excluding the second quarter 2001 venture capital fair market value adjustments.
 
 
•
 
Fee revenue totaled 86 percent of fee and net interest revenue, unchanged from the first quarter of 2002 and up from 85 percent in the second quarter of 2001, excluding the second quarter 2001 fair value adjustments of venture capital investments. Trust and investment fee revenue totaled 70 percent of fee and net interest revenue, unchanged from the first quarter of 2002 and up from 68 percent in the second quarter of 2001, excluding the second quarter 2001 venture capital fair market value adjustments.
 
 
•
 
Excluding the impact of acquisitions, the effect of performance fees, and the second quarter 2001 venture capital fair market value adjustments, fee revenue decreased 1 percent (unannualized) compared to the first quarter of 2002, and increased 1 percent compared to the prior-year period. Excluding the impact of acquisitions and the effect of performance fees, trust and investment fee revenue increased 1 percent (unannualized) compared to the first quarter of 2002, and 1 percent compared to the second quarter of 2001, primarily from net business growth.

Mellon Reports Earnings
July 16, 2002
Page 3
 
 
•
 
Assets under management totaled $588 billion at June 30, 2002, compared with $610 billion at March 31, 2002 and $546 billion at June 30, 2001, with assets under management, administration or custody totaling approximately $2.8 trillion at June 30, 2002. Assets managed by subsidiaries and affiliates outside the United States totaled $79 billion at June 30, 2002. The equity markets at June 30, 2002, as measured by the Standard and Poor’s 500 Index, decreased 13.7 percent compared with March 31, 2002 and decreased 19.2 percent compared with June 30, 2001.
 
 
•
 
Excluding the impact of acquisitions, and the 2001 amortization of goodwill, operating expense decreased 1 percent (unannualized) in the second quarter of 2002 compared with the first quarter of 2002 and increased 6 percent compared with the second quarter of 2001.
 
 
•
 
The provision for credit losses totaled $160 million in the second quarter of 2002, and included a special provision associated in large part with credit exposure related to customers that have been associated with recent allegations of accounting irregularities. The provision for credit losses totaled $4 million and $1 million respectively, in the first quarter of 2002 and second quarter of 2001. Nonperforming assets totaled $176 million, or 1.79 percent of total loans and net acquired property at June 30, 2002, compared with $75 million, or .79 percent at March 31, 2002, and $128 million, or 1.34 percent at June 30, 2001. The $101 million increase compared with March 31, 2002, resulted from the addition to nonperforming status of $100 million of loans to WorldCom, Inc.
 
 
•
 
The Corporation repurchased 7.2 million common shares during the second quarter of 2002 at an average share price of $38.30. Share repurchases in the first six months of 2002 totaled 14.3 million shares at a purchase price of $539 million for an average share price of $37.70 per share. Since Jan. 1, 1999, the Corporation’s common shares outstanding have been reduced by 88.7 million shares, or 16.9 percent, net of reissuances, due to stock repurchases totaling $4.4 billion, at an average share price of $37.36 per share. At June 30, 2002, an additional 8.1 million shares were available for repurchase under a 25 million share repurchase program authorized by the board of directors in November 2001.
 
Mellon Financial Corporation is a global financial services company. Headquartered in Pittsburgh, Mellon is one of the world’s leading providers of financial services for institutions, corporations and affluent individuals, providing institutional asset management, mutual funds, private wealth management, asset servicing, human resources services and treasury services. Mellon has approximately $2.8 trillion in assets under management, administration or custody, including $588 billion under management. Its asset management companies include The Dreyfus Corporation and U.K.-based Newton Investment Management Limited. News and other information about Mellon is available at www.mellon.com.
 
Prerecorded comments from Michael A. Bryson, chief financial officer, regarding second-quarter 2002 earnings and Mellon’s outlook for the third-quarter 2002 and full-year 2002 will be available beginning at approximately 1:30 p.m. EDT on Tuesday, July 16, 2002, through 5 p.m. EDT on Tuesday, July 23, 2002. These comments and a series of graphics can be accessed via the Internet (audio and slides) at www.mellon.com, or by telephone at (412) 236-5385 (audio portion only). Mr. Bryson’s comments and information contained in the related slides may include additional forward-looking or other material information.
 
Note:  Detailed supplemental financial information follows.

Mellon Reports Earnings
July 16, 2002
Page 4
 
 
Core Business Sectors
 
The Corporation’s business sectors reflect its management structure, the characteristics of its products and services, and the customers to which those products and services are delivered. Lines of business that offer similar or related products and services to common or similar customer decision makers have been combined into six core business sectors.
 
As a result of repositioning actions taken to sharpen its strategic focus and the January 2002 acquisition of Unifi Network, the Corporation’s core business sectors are divided into two overall reportable groups—Asset Management and Corporate & Institutional Services. The Asset Management group is comprised of the Institutional Asset Management, Mutual Funds and Private Wealth Management sectors. The Corporate & Institutional Services group is comprised of the Asset Servicing, Human Resources Services and Treasury Services sectors.
 
Quarterly Summary
   
% of Core
Sector Revenue
   
% of Core
Sector Income
Before Taxes (a)
   
Pretax Operating
Margin (a)
    
2Q02
   
1Q02
   
2Q01
   
2Q02
   
1Q02
   
2Q01
   
2Q02
   
1Q02
   
2Q01
Asset Management
   
38%
   
39%
   
40%
   
47%
   
49%
   
48%
   
36%
   
37%
   
42%
Corporate & Institutional Services
   
62%
   
61%
   
60%
   
53%
   
51%
   
52%
   
25%
   
25%
   
30%
    
  
  
  
  
  
              
Total Core Business Sectors
   
100%
   
100%
   
100%
   
100%
   
100%
   
100%
   
30%
   
30%
   
35%
(a)
 
Excludes amortization of intangibles.
 
 
Year-to-date Summary
   
% of Core
Sector Revenue
   
% of Core
Sector Income
Before Taxes (a)
   
Pretax Operating
Margin (a)
    
YTD02
   
YTD01
   
YTD02
   
YTD01
   
YTD02
   
YTD01
Asset Management
   
39%
   
40%
   
48%
   
47%
   
36%
   
40%
Corporate & Institutional Services
   
61%
   
60%
   
52%
   
53%
   
25%
   
30%
    
  
  
  
         
Total Core Business Sectors
   
100%
   
100%
   
100%
   
100%
   
30%
   
34%
(a)
 
Excludes amortization of intangibles.
 
 
 
Contribution To Earnings Per Share From Total Core Business Sectors
(in millions, except per
          
 share amounts)
   
2Q02
   
1Q02
   
Growth (b)
   
2Q02
   
2Q01
  
Growth
   
YTD02
   
YTD01
   
Growth
Net Income (a)
   
$
201
   
$
200
   
1%
   
$
201
   
$
207
  
(3)%
   
$401
   
$402
   
-%
Contribution to EPS (a)
   
$
.45
   
$
.45
   
—%
   
$
.45
   
$
.43
  
5%
   
$ .90
   
$ .83
   
8%
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.
(b)
 
Unannualized.
 
 
 
Contribution To Earnings Per Share From Total Core Business Sectors—Five-Quarter Trend
       
(in millions, except per share amounts)
   
2Q02
   
1Q02
   
4Q01
   
3Q01
   
2Q01
Net Income (a)
   
$
201
   
$
200
   
$
193
   
$
195
   
$
207
Contribution to EPS (a)
   
$
.45
   
$
.45
   
$
.41
   
$
.41
   
$
.43
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.

Mellon Repots Earnings
July 16, 2002
Page 5
 
Core Business Sectors—Quarterly data
(dollar amounts in millions, presented on an FTE basis)
 
Sector
   
Total Revenue
   
Income Before Taxes
   
Return on Equity
  
    
2Q02
   
1Q02
   
2Q01 (a)
   
2Q02
   
1Q02
   
2Q01 (a)
   
2Q02
     
1Q02
     
2Q01 (a)
  
Asset Management:
                                                               
Institutional Asset Management
   
$
131
   
$
147
   
$
124
   
$
22
   
$
30
   
$
41
   
24
%
   
33
%
   
48
%
Mutual Funds
   
 
143
   
 
143
   
 
129
   
 
57
   
 
59
   
 
56
   
34
 
   
36
 
   
38
 
Private Wealth Management
   
 
135
   
 
137
   
 
122
   
 
69
   
 
66
   
 
59
   
82
 
   
84
 
   
70
 
    
  
  
  
  
  
                    
Total Asset Management Sectors
   
 
409
   
 
427
   
 
375
   
 
148
   
 
155
   
 
156
   
43
 
   
47
 
   
50
 
Corporate & Institutional Services:
                                                               
Asset Servicing
   
 
192
   
 
180
   
 
185
   
 
58
   
 
52
   
 
75
   
32
 
   
29
 
   
42
 
Human Resources Services
   
 
273
   
 
274
   
 
189
   
 
17
   
 
22
   
 
20
   
16
 
   
21
 
   
31
 
Treasury Services
   
 
212
   
 
202
   
 
189
   
 
95
   
 
88
   
 
76
   
23
 
   
22
 
   
22
 
    
  
  
  
  
  
                    
Total Corporate & Institutional Services Sectors
   
 
677
   
 
656
   
 
563
   
 
170
   
 
162
   
 
171
   
25
 
   
23
 
   
29
 
    
  
  
  
  
  
                    
Total Core Business Sectors
   
$
1,086
   
$
1,083
   
$
938
   
$
318
   
$
317
   
$
327
   
31
%
   
31
%
   
36
%
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.
 
 
Core Business Sectors—Year-to-date data
(dollar amounts in millions, presented on an FTE basis)
 
Sector
   
Total Revenue
   
Income Before Taxes
     
Return on Equity
  
    
YTD02
   
YTD01 (a)
   
YTD02
     
YTD01 (a)
     
YTD02
       
YTD01 (a)
  
Asset Management:
                                                
Institutional Asset Management
   
$
278
   
$
246
   
$
52
     
$
76
     
28
%
     
46
%
Mutual Funds
   
 
286
   
 
258
   
 
116
     
 
106
     
35
 
     
37
 
Private Wealth Management
   
 
272
   
 
240
   
 
135
     
 
117
     
83
 
     
68
 
    
  
  
    
                 
Total Asset Management Sectors
   
 
836
   
 
744
   
 
303
     
 
299
     
45
 
     
48
 
Corporate & Institutional Services:
                                                
Asset Servicing
   
 
372
   
 
366
   
 
110
     
 
148
     
31
 
     
42
 
Human Resources Services
   
 
547
   
 
367
   
 
39
     
 
38
     
18
 
     
30
 
Treasury Services
   
 
414
   
 
367
   
 
183
     
 
148
     
22
 
     
21
 
    
  
  
    
                 
Total Corporate & Institutional Services Sectors
   
 
1,333
   
 
1,100
   
 
332
     
 
334
     
24
 
     
28
 
    
  
  
    
                 
Total Core Business Sectors
   
$
2,169
   
$
1,844
   
$
635
     
$
633
     
31
%
     
35
%
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.

Mellon Reports Earnings
July 16, 2002
Page 6
 
Asset Management
 
The Corporation’s Asset Management Group consists of those lines of business which offer investment management and wealth management services to corporations, institutions and affluent individuals aggregated into three business sectors—Institutional Asset Management, Mutual Funds and Private Wealth Management. Institutional Asset Management is comprised of Mellon Institutional Asset Management, which consists of 13 individual asset management companies or joint ventures offering a broad range of equity, fixed income and liquidity management products; and Mellon Global Investments, which distributes investment management products internationally. Mutual Funds consists of all the activities associated with the Dreyfus/Founders complex of mutual funds. Private Wealth Management consists of investment management, wealth management and private banking services for affluent individuals, including the activities of Mellon United National Bank in Florida.
 
2Q 2002 vs. 1Q 2002
(unannualized)
   
Total Revenue
Growth
     
Operating Expense
Growth
   
Income Before
Taxes Growth
Institutional Asset Management
   
(11)%    
     
(7)%    
   
(29)%    
Mutual Funds
   
1%    
     
2%    
   
—%    
Private Wealth Management
   
(2)%    
     
(4)%    
   
2%    
Total Asset Management
   
(4)%    
     
(3)%    
   
(5)%    
 
2Q 2002 vs. 2Q 2001 (a)
   
Total Revenue
Growth
   
Operating Expense
Growth
   
Income Before
Taxes Growth
    
Reported
     
Ex. Acquisitions (b)
   
Reported
     
Ex. Acquisitions (b)
   
Institutional Asset Management
   
6%    
     
(12)%    
   
31%
     
(1)%    
   
(46)%    
Mutual Funds
   
12%    
          
17%
          
5%    
Private Wealth Management
   
10%    
          
8%
          
13%    
Total Asset Management
   
9%    
     
3%    
   
20%
     
7%    
   
(5)%    
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.
(b)
 
Excludes the impact of acquisitions.
 
YTD 2002 vs. YTD 2001 (a)
   
Total Revenue
Growth
   
Operating Expense
Growth
   
Income Before
Taxes Growth
    
Reported
     
Ex. Acquisitions (b)
   
Reported
     
Ex. Acquisitions (b)
   
Institutional Asset Management
   
13%    
     
(5)%    
   
33%    
     
1%    
   
(31)%    
Mutual Funds
   
11%    
          
12%    
          
10%    
Private Wealth Management
   
13%    
          
11%    
          
15%    
Total Asset Management
   
12%    
     
6%    
   
20%    
     
8%    
   
1%    
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.
(b)
 
Excludes the impact of acquisitions.
 
Results for the Asset Management Group compared with the first quarter of 2002 reflect a 4% decline in revenue, primarily due to a seasonal decline in performance fees. Excluding the effect of performance fees, which are included in the Institutional Asset Management sector, revenue declined 1% as weakness in the

Mellon Reports Earnings
July 16, 2002
Page 7
 
equity markets was nearly offset by business growth. Expenses for the group were well controlled, declining 3%. The equity market levels as represented by the S&P 500 Index, decreased 13.7% compared with March 31, 2002.
 
Results for the Asset Management Group compared with the second quarter of 2001 were impacted by the July 2001 acquisition of Standish Mellon Asset Management, which is included in the Institutional Asset Management sector. For the Asset Management Group overall, excluding the impact of Standish, revenue and expenses increased 3% and 7%, respectively, resulting in a 5% reduction in income before taxes. Revenue for the Mutual Fund sector increased 12% due to higher long term asset levels and significantly higher institutional money market assets as shown in the table on page 11. The Private Wealth Management sector continued to show strong growth in revenue year-over-year of 10% and expense growth of 8%, resulting in year-over-year growth in income before taxes of 13%. However, the results for the group were negatively impacted by the weak equity markets as revenue in the Institutional Asset Management sector, excluding the impact of Standish, declined 12%. The S&P 500 Index, at June 30, 2002, was down 19.2% compared with June 30, 2001.
 
Corporate & Institutional Services
 
The Corporation’s Corporate & Institutional Services Group consists of those lines of business which offer trust and custody and related services as well as services for investment managers; human resources consulting and outsourcing services; and treasury related services to large corporations, institutions and government and other not-for-profit entities. Those lines of business have been aggregated into three business sectors—Asset Servicing, Human Resources Services and Treasury Services. Asset Servicing includes institutional trust and custody, foreign exchange, securities lending, back office outsourcing for investment managers, and substantially all of the Corporation’s joint ventures. Human Resources Services includes benefits consulting and administrative services for employee benefit plans, and shareholder and securities transfer services. Treasury Services includes global cash management, large corporate relationship banking, insurance premium financing, commercial real estate lending, corporate finance and derivative products, securities underwriting and trading, international banking and the activities of Mellon 1st Business Bank in California.
 
2Q 2002 vs. 1Q 2002
(unannualized)
   
Total
Revenue Growth
     
Operating
Expense Growth
   
Income Before
Taxes Growth
Asset Servicing
   
7%        
     
4%        
   
13%    
Human Resources Services
   
—%        
     
2%        
   
(26)%    
Treasury Services
   
5%        
     
3%        
   
8%    
Total Corporate & Institutional Services
   
3%        
     
3%        
   
5%    

Mellon Reports Earnings
July 16, 2002
Page 8
 
2Q 2002 vs. 2Q 2001 (a)
   
Total Revenue
Growth
   
Operating Expense
Growth
   
Income Before
Taxes Growth
    
Reported
     
Ex. Acquisitions (b)
   
Reported
     
Ex. Acquisitions (b)
   
Asset Servicing
   
3%    
     
(3)%    
   
21%    
     
6%    
   
(22)%    
Human Resources Services
   
44%    
     
3%    
   
51%    
     
7%    
   
(14)%    
Treasury Services
   
13%    
          
5%    
          
24%    
Total Corporate &
Institutional Services
   
20%    
     
4%    
   
29%    
     
6%    
   
(1)%    
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.
(b)
 
Excludes the impact of acquisitions.
 
YTD 2002 vs. YTD 2001 (a)
   
Total Revenue
Growth
   
Operating Expense
Growth
   
Income Before
Taxes Growth
    
Reported
     
Ex. Acquisitions (b)
   
Reported
     
Ex. Acquisitions (b)
   
Asset Servicing
   
1%    
     
(5)%    
   
20%    
     
6%    
   
(26)%    
Human Resources Services
   
49%    
     
2%    
   
54%    
     
6%    
   
4%    
Treasury Services
   
13%    
          
6%    
          
23%    
Total Corporate &
Institutional Services
   
21%    
     
4%    
   
31%    
     
6%    
   
(1)%    
(a)
 
Results for 2001 exclude the impact of the amortization of goodwill from purchase acquisitions.
(b)
 
Excludes the impact of acquisitions.
 
Results for the Corporate & Institutional Services Group for the second quarter of 2002 compared with the first quarter of 2002 reflected good revenue growth in the Asset Servicing and Treasury Services sectors of 7% and 5%, respectively, as well as good expense management, resulting in income before taxes growth of 5% for the Corporate & Institutional Services Group overall. In accordance with the Corporation’s management accounting reporting practices, credit quality expense for the core sectors reflects net credit losses, not the provision for credit losses. As such, the special second quarter 2002 provision for credit losses is not included in the Treasury Services sector results.
 
Results for the second quarter of 2002 compared with the second quarter of 2001 were impacted by the Unifi acquisition in the Human Resources Services sector and by the November 2001 acquisition of Eagle Investment Systems in the Asset Servicing Sector. Excluding the impact of these acquisitions, revenue and expenses grew 4% and 6%, respectively, for the Corporate & Institutional Services sector overall, (3)% and 6%, respectively, for Asset Servicing and 3% and 7%, respectively, for Human Resources Services, while income before taxes for Corporate & Institutional Services overall decreased 1%.

 
Mellon Reports Earnings
July 16, 2002
Page 9
 
 
Noninterest Revenue
 
    
Quarter ended
     
Six months ended
  
(dollar amounts in millions, unless otherwise noted)
   
June 30, 2002
     
March 31, 2002
   
June 30, 2001 (a)
     
June 30, 2002
   
June 30, 2001 (a)
  
Trust and investment fee revenue:
                                         
Investment management
   
$
355
 
   
$
370
   
$
332
 
   
$
725
   
$
656
 
Human resources services (b)
   
 
264
 
   
 
269
   
 
183
 
   
 
533
   
 
353
 
Institutional trust and custody
   
 
149
 
   
 
136
   
 
123
 
   
 
285
   
 
247
 
Total trust and investment fee revenue
   
 
768
 
   
 
775
   
 
638
 
   
 
1,543
   
 
1,256
 
Cash management revenue
   
 
71
 
   
 
68
   
 
61
 
   
 
139
   
 
114
 
Foreign currency and securities trading revenue
   
 
43
 
   
 
39
   
 
47
 
   
 
82
   
 
102
 
Financing-related revenue
   
 
38
 
   
 
34
   
 
38
 
   
 
72
   
 
78
 
Equity investment revenue
   
 
(5
)
   
 
21
   
 
(146
)
   
 
16
   
 
(140
)
Other
   
 
8
 
   
 
6
   
 
13
 
   
 
14
   
 
18
 
Total fee and other revenue
   
 
923
 
   
 
943
   
 
651
 
   
 
1,866
   
 
1,428
 
Gains on sales of securities
   
 
—
 
   
 
—
   
 
—
 
   
 
—
   
 
—
 
Total noninterest revenue
   
$
923
 
   
$
943
   
$
651
 
   
$
1,866
   
$
1,428
 
Fee revenue as a percentage of fee and net interest
revenue (FTE)
   
 
86%
 
   
 
86%
   
 
85%
 (c)
   
 
86%
   
 
85%
 (c)
Trust and investment fee revenue as a percentage of
fee and net interest revenue (FTE)
   
 
70%
 
   
 
70%
   
 
68%
 (c)
   
 
70%
   
 
67%
 (c)
Market value of assets under management at period
end (in billions)
   
$
588
 
   
$
610
   
$
546
 
                
Market value of assets under administration or custody
at period end (in billions)
   
$
2,213
 
   
$
2,324
   
$
2,295
 
                
S&P 500 Index at period end
   
 
990
 
   
 
1,147
   
 
1,224
 
                
(a)
 
In January 2002, the Corporation began to record customer expense reimbursements as revenue in accordance with a FASB staff announcement. The Corporation had historically reported expense reimbursements as a reduction of expenses. Prior period amounts have been reclassified.
(b)
 
Amounts do not necessarily agree with those presented in Business Sectors on page 5, which include net interest revenue (expense) and revenue transferred between sectors under revenue transfer agreements. Additionally, sector amounts are reported on a fully taxable equivalent basis.
(c)
 
Ratios exclude the $140 million pre-tax venture capital fair value adjustments.
Note:  For analytical purposes, the term “fee revenue,” as utilized throughout this earnings release, is defined as total noninterest revenue less gains on the sales of securities.
 
Fee revenue
 
Fee revenue of $923 million in the second quarter of 2002 decreased $20 million from the first quarter of 2002, primarily due to a seasonal decline in performance fees. Excluding the effect of trust and investment performance fees, which are primarily recorded in the fourth and first quarters each year, fee revenue decreased 1% (unannualized) compared with the first quarter of 2002, as higher trust and investment fee revenue, financing-related revenue, foreign currency and securities trading revenue and cash management revenue were offset by lower equity investment revenue. The equity markets at June 30, 2002, as measured by the S&P 500 Index, decreased 13.7% compared to March 31, 2002, while a key bond market benchmark, the Lehman Brothers Long-Term Government Bond Index, increased 6.1% compared to March 31, 2002.

Mellon Reports Earnings
July 16, 2002
Page 10
 
 
Fee revenue of $923 million in the second quarter of 2002, when compared with the second quarter of 2001, was impacted by acquisitions, primarily the July 2001 acquisition of Standish Mellon Asset Management, the November 2001 acquisition of Eagle Investment Systems and the January 2002 acquisition of Unifi Network, performance fees, and the second quarter 2001 $140 million fair market value venture capital adjustments. Excluding these items, fee revenue increased 1% in the second quarter of 2002, compared with the second quarter of 2001, reflecting higher trust and investment revenue and higher cash management revenue. Excluding the effect of acquisitions and performance fees, trust and investment fee revenue increased 1% in the second quarter of 2002 compared with the second quarter of 2001, reflecting the impact of business growth offset in part by a decline in the equity markets. The equity markets at June 30, 2002, as measured by the S&P 500 Index, decreased 19.2% compared with June 30, 2001, while a key bond market benchmark, the Lehman Brothers Long-Term Government Bond Index, increased 9.2% compared to June 30, 2001.
 
      
2nd Qtr. 2002
over
1st Qtr. 2002
     
2nd Qtr. 2002
over
2nd Qtr. 2001
     
Six Mo. 2002
over
Six Mo. 2001
Fee revenue growth (a)
     
(unannualized)
     
(annualized)
     
(annualized)
Trust and investment fee revenue growth
     
1%
     
1%
     
2%
Total fee revenue growth
     
(1)%
     
1%
     
2%
(a)
 
Excludes the effect of acquisitions, performance fees and the second quarter 2001 fair market value venture capital adjustments.
 
Investment management fee revenue
 
    
Quarter ended
   
Six months ended
(in millions)
   
June 30,
2002
   
March 31,
2002
   
June 30,
2001
   
June 30,
2002
   
June 30,
2001
Managed mutual funds (a):
                                   
Equity funds
   
$
69
   
$
70
   
$
75
   
$
139
   
$
150
Money market funds
   
 
78
   
 
76
   
 
60
   
 
154
   
 
111
Bond and fixed-income funds
   
 
35
   
 
35
   
 
31
   
 
70
   
 
61
Nonproprietary
   
 
9
   
 
8
   
 
8
   
 
17
   
 
16
Total managed mutual funds
   
 
191
   
 
189
   
 
174
   
 
380
   
 
338
Institutional
   
 
84
   
 
99
   
 
77
   
 
183
   
 
157
Private clients
   
 
80
   
 
82
   
 
81
   
 
162
   
 
161
Total investment management fee revenue
   
$
355
   
$
370
   
$
332
   
$
725
   
$
656
(a)
 
Net of quarterly mutual fund fees waived and fund expense reimbursements of $10 million, $10 million and $6 million at June 30, 2002, March 31, 2002, and June 30, 2001, respectively. Net of year-to-date fees waived and fund expense reimbursements of $20 million and $13 million at June 30, 2002, and June 30, 2001.
 
Excluding the effect of performance fees, investment management fee revenue was down $2 million in the second quarter of 2002 compared with the first quarter of 2002. Performance fees totaled $4 million in the second quarter of 2002, compared with $17 million in the first quarter of 2002 and $7 million in the second quarter of 2001.
 
Investment management fee revenue, when compared to the second quarter of 2001, was impacted primarily by the Standish Mellon acquisition. Revenue from Standish Mellon is primarily included in institutional

Mellon Reports Earnings
July 16, 2002
Page 11
 
 
investment management fee revenue in the table. Excluding the impact of the acquisition, investment management fee revenue increased 2% in the second quarter of 2002 compared with the second quarter of 2001. This increase primarily resulted from increased revenue relating to money market and bond and fixed-income mutual funds.
 
Mutual fund management fees are based upon the daily average net assets of each fund. The average net assets of proprietary mutual funds managed in the second quarter of 2002 were $199 billion, up $4 billion, or 2% from $195 billion in the first quarter of 2002, and up $40 billion, or 25%, from $159 billion in the second quarter of 2001. These increases primarily resulted from increases in average net assets of institutional taxable money market funds. Proprietary equity funds averaged $46 billion in the second quarter of 2002, a decrease of $1 billion, or 3%, compared with $47 billion in the first quarter of 2002, and a decrease of $4 billion, or 9%, compared with $50 billion in the second quarter of 2001.
 
 
Market value of assets under management, administration or custody at period end
       
(in billions)
   
June 30, 2002
     
March 31, 2002
   
Dec. 31, 2001
   
Sept. 30,
2001
   
June 30,
2001
Mutual funds managed:
                                     
Equity funds
   
$
43
 
   
$
48
   
$
47
   
$
43
   
$
51
Money market funds
   
 
123
 
   
 
121
   
 
111
   
 
93
   
 
92
Bond and fixed-income funds
   
 
26
 
   
 
26
   
 
26
   
 
27
   
 
22
Nonproprietary
   
 
21
  (a)
   
 
24
   
 
24
   
 
22
   
 
25
Total mutual funds managed
   
 
213
 
   
 
219
   
 
208
   
 
185
   
 
190
Institutional (b)
   
 
326
  (a)
   
 
339
   
 
334
   
 
316
   
 
306
Private clients
   
 
49
 
   
 
52
   
 
50
   
 
46
   
 
50
Total market value of assets
under management
   
$
588
 
   
$
610
   
$
592
   
$
547
   
$
546
Market value of assets under
administration or custody (c)(d)
   
$
2,213
 
   
$
2,324
   
$
2,082
   
$
2,077
   
$
2,295
Total market value of assets under
management, administration or custody
   
$
2,801
 
   
$
2,934
   
$
2,674
   
$
2,624
   
$
2,841
S&P 500 Index at period end
   
 
990
 
   
 
1,147
   
 
1,148
   
 
1,041
   
 
1,224
 
(a)
 
At June 30, 2002, the combined market values of $21 billion of nonproprietary mutual funds and $326 billion of institutional assets managed, by asset type, were as follows: $97 billion equities, $30 billion balanced, $74 billion fixed income, $93 billion money market, (which includes securities lending assets of $48 billion); and $53 billion in overlay and global fixed-income products, for a total of $347 billion.
(b)
 
Includes assets managed at Pareto Partners of $35 billion at June 30, 2002, $34 billion at March 31, 2002, $33 billion at Dec. 31, 2001, $28 billion at Sept. 30, 2001, and $29 billion at June 30, 2001. The Corporation has a 30% equity interest in Pareto Partners.
(c)
 
Includes $326 billion of assets at June 30, 2002; $304 billion of assets at March 31, 2002; $289 billion of assets at Dec. 31, 2001; $276 billion of assets at Sept. 30, 2001; and $299 billion of assets at June 30, 2001, administered by CIBC Mellon Global Securities Services, a joint venture between the Corporation and the Canadian Imperial Bank of Commerce.
(d)
 
Assets administered by the Corporation under ABN AMRO Mellon, a strategic alliance of the Corporation and ABN AMRO, included in the table above, were $166 billion at June 30, 2002; $139 billion at March 31, 2002; $130 billion at Dec. 31, 2001; $118 billion at Sept. 30, 2001; and $123 billion at June 30, 2001.
 
 
As shown in the table above, the market value of assets under management was $588 billion at June 30, 2002, a $22 billion, or 4% (unannualized), decrease from $610 billion at March 31, 2002. The $588 billion of assets managed were comprised as follows: 34% equities; 20% fixed income; 30% money market; 9%

Mellon Reports Earnings
July 16, 2002
Page 12
 
overlay and global fixed-income products; and 7% securities lending cash collateral. As shown in the table below, the decrease was primarily due to the declining equity markets, as long-term net inflows of $4 billion were offset by short-term outflows.
 
Changes in market value of assets under management
(in billions)
     
Second quarter 2002
       
June 30, 2001 to June 30, 2002
  
Market value of assets under management at beginning of period
     
$610
 
     
$546
 
Net inflows (a):
                  
Long-term
     
4
 
     
7
 
Short-term
     
(3
)
     
28
 
      
    
Total net inflows (b)
     
1
 
     
35
 
Net market depreciation (a)
     
(23
)
     
(35
)
Acquisitions
     
—
 
     
42
 
Market value of assets under management at end of period
     
$588
 
     
$588
 
(a)
 
Estimated.
(b)
 
Represents less than 1% and 6% of beginning balance, respectively.
 
Human Resources Services fee revenue
 
Human Resources Services fee revenue decreased 2% (unannualized), compared with the first quarter of 2002 and, excluding the effect of acquisitions, decreased 1% compared with the second quarter of 2001.
 
Institutional trust and custody fee revenue
 
Institutional trust and custody fee revenue, excluding securities lending revenue, increased 6% (unannualized) compared to the first quarter of 2002 and, also excluding the effect of acquisitions, increased 11% compared to the second quarter of 2001, reflecting the impact of business growth. Securities lending revenue totaled $24 million in the second quarter of 2002, compared with $19 million in the first quarter of 2002 and $31 million in the second quarter of 2001.
 
Other fee revenue categories
 
Cash management fee revenue increased $3 million, or 4% (unannualized), compared with the first quarter of 2002, and $10 million, or 17%, in the second quarter of 2002, compared with the second quarter of 2001. These increases primarily resulted from higher volumes of electronic and lockbox services. Cash management revenue does not include revenue from customers holding compensating balances on deposits in lieu of paying cash fees. The earnings on the compensating balances are recognized in net interest revenue.
 
Foreign currency and securities trading revenue increased $4 million, or 11% (unannualized), compared with the first quarter of 2002 and decreased $4 million, or 10%, in the second quarter of 2002, compared with the second quarter of 2001. The increase compared to the first quarter of 2002 was primarily due to higher levels of market volatility and client volumes.
 
Financing-related and equity investment revenue totaled $33 million in the second quarter of 2002, compared with $55 million in the first quarter of 2002 and $32 million in the second quarter of 2001, excluding the fair value adjustment of venture capital investments. Financing-related revenue, which primarily includes loan commitment fees; letters of credit and acceptance fees; gains or losses on loan sales; and gains or losses on lease residuals increased $4 million, or 15%, compared with the first quarter of 2002

Mellon Reports Earnings
July 16, 2002
Page 13
 
 
and was flat in the second quarter of 2002 compared with the second quarter of 2001. Equity investment revenue, which includes realized and unrealized gains and losses on venture capital and non-venture capital investments, decreased $26 million compared with the first quarter of 2002 and improved by $1 million in the second quarter of 2002, compared with the second quarter of 2001, excluding the second quarter 2001 venture capital fair value adjustments. The decrease compared to the first quarter of 2002 was primarily due to the write-down of publicly held investments in the venture capital portfolio and lower equity security gains. Revenue from venture capital investments totaled $(6) million in the second quarter of 2002, compared with $5 million in the first quarter of 2002, and $(2) million in the second quarter of 2001, excluding the fair value adjustment of $(140) million.
 
Fee revenue for the first six months of 2002 totaled $1.866 billion, a $438 million increase compared with the first six months of 2001. Fee revenue in the first six months of 2002 was positively impacted by acquisitions, most notably the July 2001 acquisition of Standish Mellon and the January 2002 acquisition of Unifi Network. Excluding the acquisitions, performance fees and the second quarter 2001 fair value adjustment of venture capital investments, fee revenue for the first half of 2002 increased 2% compared with the first half of 2001, due to higher trust and investment fee revenue and cash management fees, offset in part by lower foreign currency and securities trading revenue.
 
 
Net Interest Revenue
 
    
Quarter ended
   
Six months ended
(dollar amounts in millions)
   
June 30,
2002
   
March 31,
2002
   
June 30,
2001
   
June 30,
2002
   
June 30,
2001
Net interest revenue (FTE)
   
$
156
   
$
158
   
$
138
   
$
314
   
$
280
Net interest margin (FTE)
   
 
2.76%
   
 
2.91%
   
 
2.61%
   
 
2.84%
   
 
2.52%
Average money market investments
   
$
2,128
   
$
2,536
   
$
2,331
   
$
2,331
   
$
2,515
Average trading account securities
   
 
748
   
 
689
   
 
379
   
 
718
   
 
371
Average securities
   
 
9,982
   
 
9,464
   
 
8,513
   
 
9,725
   
 
8,611
Average loans
   
 
9,662
   
 
9,079
   
 
10,068
   
 
9,372
   
 
10,175
Funds allocated to discontinued operations
   
 
246
   
 
474
   
 
33
   
 
360
   
 
777
    
  
  
  
  
Average interest-earning assets
   
$
22,766
   
$
22,242
   
$
21,324
   
$
22,506
   
$
22,449
Note: FTE denotes presentation on a fully taxable equivalent basis.
 
 
Net interest revenue on a fully taxable equivalent basis decreased $2 million compared with the first quarter of 2002 and increased $18 million in the second quarter of 2002 compared with the second quarter of 2001. The increase compared with the second quarter of 2001 reflected lower funding costs as well as a higher level of interest-earning assets. Average interest-earning assets increased $1.4 billion compared with the second quarter of 2001, due to higher levels of securities and trading account securities.
 
Net interest revenue on a fully taxable equivalent basis increased $34 million in the first six months of 2002 compared with the prior-year period, reflecting lower funding costs.

 
Mellon Reports Earnings
July 16, 2002
Page 14
 
 
Operating Expense
 
 
(dollar amounts in millions)
   
Quarter ended
   
Six months ended
  
June 30, 2002
   
March 31, 2002
   
June 30, 2001 (a)
   
June 30, 2002
   
June 30, 2001 (a)
      
Staff expense
   
$
458
   
$
476
   
$
366
   
$
934
   
$
734
Professional, legal and other purchased services
   
 
94
   
 
83
   
 
78
   
 
177
   
 
153
Net occupancy expense
   
 
60
   
 
63
   
 
53
   
 
123
   
 
105
Equipment expense
   
 
53
   
 
56
   
 
35
   
 
109
   
 
73
Amortization of goodwill
   
 
—
   
 
—
   
 
18
   
 
—
   
 
36
Amortization of other intangible assets
   
 
4
   
 
3
   
 
1
   
 
7
   
 
3
Other expense
   
 
91
   
 
91
   
 
76
   
 
182
   
 
146
Total operating expense
   
 
$760
   
 
$772
   
 
$627
   
$
1,532
   
$
1,250
Efficiency ratio, excluding amortization of
goodwill in 2001 (b)
   
 
70%
   
 
70%
   
 
65%
   
 
70%
   
 
65%
(a)
 
In January 2002 the Corporation began to record customer expense reimbursements as revenue in accordance with a FASB staff announcement. The Corporation had historically reported expense reimbursements as a reduction of expenses. Prior period amounts have been reclassified.
(b)
 
Operating expense as a percentage of fee and net interest revenue, computed on a taxable equivalent basis, excluding the second quarter 2001 venture capital fair value adjustments and gains on the sales of securities.
 
 
 
Operating expense decreased 1% (unannualized), in the second quarter of 2002 compared with the first quarter of 2002, primarily reflecting lower incentive expense in the second quarter of 2002, offset in part by higher professional, legal and other purchased services.
 
Operating expense for the second quarter 2002 was impacted by acquisitions, primarily the July 2001 acquisition of Standish Mellon Asset Management, the November 2001 acquisition of Eagle Investment Systems and the January 2002 acquisition of Unifi Network, and the adoption of Statement of Financial Accounting Standard (FAS) No. 142, which requires that goodwill no longer be amortized. Excluding the effect of acquisitions and the second quarter 2001 amortization of goodwill, operating expense increased 6% in the second quarter of 2002 compared with the second quarter of 2001. The increase reflected, in large part, expenses incurred in support of anticipated business growth.
 
Operating expense growth
     
2nd Qtr. 2002
over
1st Qtr. 2002 (unannualized)
     
2nd Qtr. 2002
over
2nd Qtr. 2001 (annualized) (a)
     
Six Mo. 2002
over
Six Mo. 2001 (annualized) (a)
Operating expense growth
     
(1)%
     
6%
     
7%
(a)
 
Excludes the effect of acquisitions, and the second quarter 2001 and year-to-date 2001 amortization of goodwill.
 
 
 
Operating expense for the first six months of 2002 totaled $1.532 billion, a $282 million increase compared with the first six months of 2001. Excluding the effect of acquisitions and the first six months of 2001 amortization of goodwill, operating expenses increased 7% in the first six months of 2002 compared with the first six months of 2001, due to expenses incurred in support of anticipated business growth.

Mellon Reports Earnings
July 16, 2002
Page 15
 
 
Income Taxes
 
The Corporation’s effective tax rate on income from continuing operations, excluding the special provision for credit losses, for the first half of 2002 was 34.2% compared with 34.6% for the first half of 2001, excluding the impact of the amortization of non-tax deductible goodwill in 2001 and excluding the effect of the venture capital fair value adjustment in the second quarter of 2001. It is currently anticipated that the effective tax rate will remain approximately the same for the remainder of 2002.
 
 
Provision and Reserves for Credit Exposure
 
    
Quarter ended
     
Six months ended
  
(dollar amounts in millions)
   
June 30,
2002
     
March 31,
2002
     
June 30,
2001
     
June 30,
2002
     
June 30,
2001
  
Provision for credit losses
   
$160
 
   
$    4
 
   
$  1
 
   
$164
 
   
$(14
)
Net credit (losses) recoveries:
                                   
Commercial and financial
   
$  (7
)
   
$  (2
)
   
$(20
)
   
$  (9
)
   
$(21
)
Consumer credit
   
—
 
   
(1
)
   
—
 
   
(1
)
   
—
 
Total net credit losses
   
$  (7
)
   
$  (3
)
   
$(20
)
   
$(10
)
   
$(21
)
Annualized net credit losses to average loans
   
.26%
 
   
.15%
 
   
.79%
 
   
.21%
 
   
.42%
 
Reserve for loan losses (a)(b):
   
$242
 
   
$106
 
   
$217
 
              
As a percentage of total loans (a)
   
2.47%
 
   
1.11%
 
   
2.28%
 
              
As a percentage of nonperforming loans (a)
   
138%
 
   
143%
 
   
175%
 
              
Reserve for unfunded commitments (a)(b)
   
$  51
 
   
$  32
 
   
$  19
 
              
Total reserve for credit exposure
   
$293
 
   
$138
 
   
$236
 
              
(a)
 
At period end.
(b)
 
In the second quarter of 2002, the Corporation began to record the reserve for commercial loan commitments in a liability account. Previously, any such reserve was included in the reserve for loan losses. Prior period amounts have been reclassified.
 
 
The provision for credit losses totaled $160 million in the second quarter of 2002, including a special provision recorded in large part for credit exposure related to customers that have been associated with recent allegations of accounting irregularities. Net credit losses totaled $7 million. Of the special provision, $20 million was recorded in a liability account established for credit exposure resulting primarily from unfunded loan commitments and letters of credit. At June 30, 2002, $51 million was reserved for unfunded commitments, resulting in a total reserve for credit exposure of $293 million at June 30, 2002, compared with $138 million at March 31, 2002, and $236 million at June 30, 2001.

 
Mellon Reports Earnings
July 16, 2002
Page 16
 
 
Unfunded Commitments To Extend Credit
 
The following table presents a summary of unfunded commitments to extend credit at June 30, 2002.
 
Unfunded commitments to extend credit at June 30, 2002
(dollar amounts in millions)
         
    
Unfunded commitments to extend credit
    
Industry sector (a)
   
Number of
customers (b)
   
Commitments
     
Investment grade (c)
  
Commitment expiration
  
Memo:
Loans
            
<1 year
     
1-5 years
   
>5 years
  
Financial institutions
   
     63
   
$
3,446
     
  99%
  
$
2,516
     
$
930
   
$
—
  
$
101
Insurance
   
     70
   
 
1,639
     
100%
  
 
978
     
 
661
   
 
—
  
 
164
Electric and gas utilities
   
     66
   
 
1,540
     
  99%
  
 
1,178
     
 
362
   
 
—
  
 
249
Energy
   
     47
   
 
1,289
     
  99%
  
 
863
     
 
426
   
 
—
  
 
153
Mutual funds
   
     35
   
 
1,263
     
100%
  
 
1,184
     
 
79
   
 
—
  
 
275
Electrical and electronic equipment
   
     49
   
 
1,162
     
  90%
  
 
564
     
 
598
   
 
—
  
 
293
Capital goods
   
     37
   
 
1,071
     
  96%
  
 
560
     
 
511
   
 
—
  
 
113
Services
   
   310
   
 
884
     
  95%
  
 
475
     
 
407
   
 
2
  
 
459
Metals
   
     42
   
 
793
     
  95%
  
 
369
     
 
424
   
 
—
  
 
84
Media
   
     32
   
 
768
     
  91%
  
 
337
     
 
410
   
 
21
  
 
340
Telecommunications
   
       8
   
 
748
     
100%
  
 
585
     
 
163
   
 
—
  
 
207
Chemicals
   
     34
   
 
692
     
  90%
  
 
309
     
 
383
   
 
—
  
 
132
Food
   
     25
   
 
662
     
100%
  
 
232
     
 
430
   
 
—
  
 
83
Transportation
   
     27
   
 
637
     
100%
  
 
397
     
 
217
   
 
23
  
 
92
Scientific and medical equipment
   
     16
   
 
620
     
  95%
  
 
333
     
 
287
   
 
—
  
 
142
Other commercial and financial
   
   947
   
 
3,561
     
  88%
  
 
2,079
     
 
1,461
   
 
21
  
 
2,912
Total commercial and financial (d)
   
1,808
   
$
20,775
     
  96%
  
$
12,959
     
$
7,749
   
$
67
  
$
5,799
Real estate
   
1,320
   
 
667
     
  78%
  
 
310
     
 
345
   
 
12
  
 
2,433
Consumer
   
   NM
   
 
506
     
  NM
  
 
246
     
 
201
   
 
59
  
 
1,587
Total
   
   NM
   
$
21,948
     
  NM
  
$
13,515
     
$
8,295
   
$
138
  
$
9,819
(a)
 
The industry sectors shown are those that comprise $500 million or more of unfunded commercial and financial commitments.
(b)
 
Number of customers represents those customers with available commitments.
(c)
 
Investment grade commitments are those where the customer has a Moody’s long-term rating of Baa3 or better, and/or a Standard and Poor’s long-term rating of BBB- or better, or if unrated, has been assigned an equivalent rating using the Corporation’s internal risk rating. The percentages in the table are based upon the dollar amounts of investment grade commitments as a percentage of the related dollar amount of commitments for each industry sector.
(d)
 
Includes commercial and financial, lease finance and international loans and commitments.
NM—Not relevant for this disclosure.

Mellon Reports Earnings
July 16, 2002
Page 17
 
 
Nonperforming Assets
 
(dollar amounts in millions)
   
June 30,
2002
   
March 31,
2002
   
Dec. 31,
2001
   
June 30,
2001
Nonperforming loans:
                    
Commercial and financial
   
$160
   
$69
   
$56
   
$121
Consumer credit
   
4
   
2
   
2
   
2
Commercial real estate
   
11
   
3
   
1
   
1
Total nonperforming loans
   
175
   
74
   
59
   
124
Acquired property:
                    
Real estate acquired
   
1
   
1
   
2
   
3
Other assets acquired
   
—
   
—
   
1
   
1
Total acquired property
   
1
   
1
   
3
   
4
Total nonperforming assets
   
$176
   
$75
   
$62
   
$128
Nonperforming loans as a percentage of total loans
   
1.78%
   
.77%
   
.69%
   
1.30%
Nonperforming assets as a percentage of total loans and net acquired property
   
1.79%
   
.79%
   
.72%
   
1.34%
Nonperforming assets as a percentage of Tier I capital plus the reserve for loan losses
   
7.51%
   
3.00%
   
2.30%
   
4.24%
 
Nonperforming assets increased $101 million compared with March 31, 2002, and $48 million compared with June 30, 2001. The increase compared with the prior periods resulted from the addition to nonperforming status of a $100 million loan to WorldCom, Inc. Of the $176 million balance of total nonperforming assets at June 30, 2002, $100 million was to WorldCom, Inc. and $39 million was to a California-based electric and natural gas utility company that voluntarily filed for Chapter 11 bankruptcy protection in the second quarter of 2001 as the result of its inability, due to rules in that state governing the industry’s deregulation, to increase rates to levels needed to cover higher costs for power.

 
Mellon Reports Earnings
July 16, 2002
Page 18
 
 
Selected Capital Data
 
(dollar amounts in millions, except per share
amounts; common shares in thousands)
   
June 30,
2002
       
Dec. 31,
2001
       
June 30,
2001
Total shareholders’ equity
   
$  3,271
 
     
$  3,482
 
     
$  3,443
Total shareholders’ equity to assets ratio
   
9.66%
 
     
9.79%
 
     
7.92%
Tangible shareholders’ equity (a)
   
$  1,636
 
     
$  1,986
 
     
$  2,369
Tangible shareholders’ equity to assets ratio (b)
   
5.08%
 
     
5.84%
 
     
5.60%
Tier I capital ratio (c)
   
7.9%
 (d)
     
8.81%
 
     
7.31%
Total (Tier I plus Tier II) capital ratio (c)
   
12.9%
 (d)
     
13.65%
 
     
11.82%
Leverage capital ratio (c)
   
6.7%
 (d)
     
6.31%
 
     
6.28%
Book value per common share
   
$    7.52
 
     
$    7.80
 
     
$    7.33
Tangible book value per common share
   
$    3.76
 
     
$    4.45
 
     
$    5.04
Closing common stock price per share
   
$  31.43
 
     
$  37.62
 
     
$  46.00
Market capitalization
   
$13,677
 
     
$16,798
 
     
$21,621
Common shares outstanding
   
435,151
 
     
446,509
 
     
470,030
(a)
 
Includes $24 million, $52 million and $79 million, respectively, of minority interest. In addition, includes $397 million, $299 million and $198 million, respectively, of tax benefits related to tax deductible goodwill and intangible assets.
(b)
 
Shareholders’ equity plus minority interest and less goodwill and intangible assets divided by total assets less goodwill and intangible assets. The amount of goodwill and intangible assets subtracted from shareholders’ equity and total assets is net of the tax benefit.
(c)
 
Includes discontinued operations.
(d)
 
Estimated.
 
 
The Corporation’s equity to assets capital ratios at June 30, 2002, compared with June 30, 2001, reflect the positive effect of a smaller balance sheet, offset in part by the effect of common stock repurchases. The improvement in the leverage capital ratio was primarily due to lower average total assets as a result of the completed dispositions. The risk-based capital ratios include discontinued operations.
 
During the second quarter of 2002, 7.2 million shares of common stock were repurchased at a purchase price of $275 million for an average share price of $38.30 per share. Share repurchases in the first six months of 2002 totaled 14.3 million shares at a purchase price of $539 million for an average share price of $37.70 per share. Common shares outstanding at June 30, 2002, were 16.9% lower than at Dec. 31, 1998, reflecting an 88.7 million share reduction, net of shares reissued primarily for employee benefit plan purposes. This reduction was due to stock repurchases totaling approximately $4.4 billion, at an average share price of $37.36 per share. At June 30, 2002, an additional 8.1 million common shares were available for repurchase under a 25 million share repurchase program authorized by the board of directors in November 2001.

Mellon Reports Earnings
July 16, 2002
Page 19
 
 
Discontinued Operations
 
Reflected as discontinued operations throughout the Corporation’s financial statements are the results of regional consumer banking, small business banking, and certain middle market banking operations, which were sold to Citizens Financial Group, Inc. (Citizens) in December 2001; the Mellon Leasing Corporation businesses that served mid-to-large corporations and vendors of small ticket equipment, and Mellon Business Credit, which were sold in June 2001; Dreyfus Brokerage Services, which was sold in January 2002; and the disposition in December 2001 of loans and commitments to middle market companies not sold to Citizens. In accordance with generally accepted accounting principles (GAAP), earnings, assets and liabilities of these businesses are shown separately in the income statement and balance sheet, respectively, for all periods presented. Accordingly, all information in this earnings release, including all supplemental information, reflects continuing operations unless otherwise noted.
 
Gains and Losses on Disposals of Discontinued Operations
 
The after-tax net gain of $2 million in the second quarter of 2002 primarily resulted from the resolution of sale-related issues that were uncertain at the time of the dispositions. In the first quarter of 2002, the Corporation recorded an additional $3 million after-tax net gain on the Citizens’ transaction. The additional gain primarily resulted from subsequent price adjustments. The $101 million after-tax net loss in the second quarter of 2001 resulted from the sale of the Mellon Leasing Corporation businesses that served mid-to-large and small-ticket leasing businesses, and Mellon Business Credit.
 
Second Quarter 2001 Operating Results—Continuing Operations
 
The following table provides a reconcilement of second quarter 2001 and year-to-date 2001 results from continuing operations computed in accordance with GAAP to continuing operations, excluding the $140 million venture capital fair market value adjustments.
 
    
Second quarter 2001
     
Six months ended 2001
(dollar amounts in millions, per share amounts are diluted)
   
Amount
     
Per Share
     
Amount
     
Per Share
Income from continuing operations—GAAP
   
$102
     
$.21
     
$301
     
$.62
Plus after-tax impact of amortization of goodwill from purchase acquisitions
   
16
     
.04
     
33
     
.07
    
    
    
    
Adjusted income from continuing operations
   
118
     
.25
     
334
     
.69
Plus venture capital fair market value adjustments, after-tax
   
91
     
.19
     
91
     
.19
Adjusted income from continuing operations—operating basis
   
$209
     
$.44
     
$425
     
$.88
Adjusted return on equity
   
22.5%
            
22.2%
       

 
Mellon Reports Earnings
July 16, 2002
Page 20
 
 
Impact of New Accounting Standards
 
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (FAS) No. 141, “Business Combinations,” and FAS No. 142, “Goodwill and Other Intangible Assets.” These standards, among other things, eliminated the pooling of interests method of accounting and require that goodwill no longer be amortized, but goodwill is subject to impairment testing. The effective date for FAS No. 141 was July 1, 2001, and the effective date for FAS No. 142 was Jan. 1, 2002. For acquisitions completed prior to July 1, 2001, existing goodwill was amortized through the end of 2001, after which amortization has ceased. For acquisitions initiated after June 30, 2001, goodwill is not amortized. As required by FAS No. 142, initial testing for goodwill impairment was completed by June 30, 2002, and it was determined that no adjustments for impairment were needed. Results excluding the impact of goodwill amortization in 2001 are shown below.
 
Adjusted 2001 financial results—excluding the amortization of goodwill in 2001
    
Quarter ended
     
Six months ended
    
Reported
     
Adjusted
     
Reported
     
Adjusted
(dollar amounts in millions, except
 per share amounts; ratios annualized)
   
June 30,
2002 (a)
     
March 31,
2002
     
June 30,
2001
     
June 30,
2002 (a)
     
June 30,
2001
Income from continuing operations
   
$106
     
$211
     
$102
     
$317
     
$301
Plus after-tax impact of amortization of goodwill from purchase acquisitions:
                                 
Goodwill
   
—
     
—
     
15
     
—
     
31
Equity method goodwill (b)
   
—
     
—
     
1
     
—
     
2
Income from continuing operations
   
$106
     
$211
     
$118
     
$317
     
$334
Earnings per share—diluted
   
$ .24
     
$ .47
     
$ .25
     
$ .71
     
$ .69
Return on equity
   
12.6%
     
24.8%
     
12.8%
     
18.8%
     
17.5%
(a)
 
Includes a 23 cents per share special provision for credit losses recorded in the second quarter of 2002.
(b)
 
Relates to the goodwill on equity method investments and joint ventures. The income from these investments is recorded in fee revenue.

Mellon Reports Earnings
July 16, 2002
Page 21
 
SUMMARY DATA
Mellon Financial Corporation
 
    
Quarter ended
     
Six months ended
  
(dollar amounts in millions, except per share
amounts; common shares in thousands)
   
June 30,
2002
   
March 31,
2002
   
June 30,
2001 (a)
     
June 30,
2002
   
June 30,
2001 (a)
  
Continuing operations:
                                       
Diluted earnings per share
   
$
.24
   
$
.47
   
$
.25
 
   
$
.71
   
$
.69
 
Income from continuing operations
   
$
106
   
$
211
   
$
118
 
   
$
317
   
$
334
 
Return on equity
   
 
12.6%
   
 
24.8%
   
 
12.8%
 
   
 
18.8%
   
 
17.5%
 
Net income:
                                       
Diluted earnings per share
   
$
.25
   
$
.48
   
$
.17
 
   
$
.73
   
$
.76
 
Net income
   
$
109
   
$
216
   
$
79
 
   
$
325
   
$
370
 
Return on equity
   
 
13.0%
   
 
25.4%
   
 
8.5%
 
   
 
19.3%
   
 
19.3%
 
Fee revenue as a percentage of fee and net interest revenue (FTE)
   
 
86%
   
 
86%
   
 
85%
 (b)
   
 
86%
   
 
85%
 (b)
Trust and investment fee revenue as a percentage of fee and net interest revenue (FTE)
   
 
70%
   
 
70%
   
 
68%
 (b)
   
 
70%
   
 
67%
 (b)
Efficiency ratio, excluding amortization of goodwill in 2001
   
 
70%
   
 
70%
   
 
65%
 (b)
   
 
70%
   
 
65%
 (b)
Average common shares and equivalents outstanding:
                                       
Basic
   
 
437,719
   
 
443,882
   
 
474,555
 
   
 
440,784
   
 
478,614
 
Diluted
   
 
441,013
   
 
447,623
   
 
480,301
 
   
 
444,291
   
 
484,790
 
Average balances
                                       
Money market investments
   
$
2,128
   
$
2,536
   
$
2,331
 
   
$
2,331
   
$
2,515
 
Trading account securities
   
 
748
   
 
689
   
 
379
 
   
 
718
   
 
371
 
Securities
   
 
9,982
   
 
9,464
   
 
8,513
 
   
 
9,725
   
 
8,611
 
    
  
  
  
  
Total money market investments and securities
   
 
12,858
   
 
12,689
   
 
11,223
 
   
 
12,774
   
 
11,497
 
Loans
   
 
9,662
   
 
9,079
   
 
10,068
 
   
 
9,372
   
 
10,175
 
Funds allocated to discontinued operations
   
 
246
   
 
474
   
 
33
 
   
 
360
   
 
777
 
    
  
  
  
  
Total interest-earning assets
   
 
22,766
   
 
22,242
   
 
21,324
 
   
 
22,506
   
 
22,449
 
Total assets
   
 
33,398
   
 
33,035
   
 
45,773
 
   
 
33,217
   
 
46,979
 
Deposits
   
 
17,918
   
 
17,504
   
 
16,721
 
   
 
17,713
   
 
17,528
 
Total shareholders’ equity
   
 
3,350
   
 
3,455
   
 
3,735
 
   
 
3,403
   
 
3,863
 
(a)
 
Second quarter and first six months of 2001 results exclude the after-tax impact of the amortization of goodwill from purchase acquisitions of $16 million, or 4 cents per share and $33 million, or 7 cents per share, respectively for continuing operations, and $24 million, or 5 cents per share and $51 million, or 10 cents per share, respectively, on a net income basis. See page 20 for additional information.
(b)
 
Ratios were calculated excluding the venture capital fair value adjustments shown in the table on page 19.
 
Note:
 
All calculations are based on unrounded numbers. FTE denotes presentation on a fully taxable equivalent basis.  Returns are annualized.

Mellon Reports Earnings
July 16, 2002
Page 22
 
CONDENSED CONSOLIDATED INCOME STATEMENT
Mellon Financial Corporation
 
    
Quarter ended
     
Six months ended
  
(in millions, except per share amounts)
   
June 30,
2002
     
March 31,
2002
   
June 30,
2001 (a)
     
June 30,
2002
   
June 30,
2001 (a)
  
Noninterest revenue
                                     
Trust and investment fee revenue
   
$768
 
   
$775
   
$
638
 
   
 
$1,543
   
 
$1,256
 
Cash management revenue
   
71
 
   
68
   
 
61
 
   
 
139
   
 
114
 
Foreign currency and securities trading revenue
   
43
 
   
39
   
 
47
 
   
 
82
   
 
102
 
Financing-related revenue
   
38
 
   
34
   
 
38
 
   
 
72
   
 
78
 
Equity investment revenue
   
(5
)
   
21
   
 
(146
)
   
 
16
   
 
(140
)
Other
   
8
 
   
6
   
 
13
 
   
 
14
   
 
18
 
    
  
  
  
  
Total fee and other revenue
   
923
 
   
943
   
 
651
 
   
 
1,866
   
 
1,428
 
Gains on sales of securities
   
—
 
   
—
   
 
—
 
   
 
—
   
 
—
 
    
  
  
  
  
Total noninterest revenue
   
923
 
   
943
   
 
651
 
   
 
1,866
   
 
1,428
 
Net interest revenue
                                     
Interest revenue
   
275
 
   
269
   
 
345
 
   
 
544
   
 
715
 
Interest expense
   
123
 
   
113
   
 
208
 
   
 
236
   
 
438
 
    
  
  
  
  
Net interest revenue
   
152
 
   
156
   
 
137
 
   
 
308
   
 
277
 
Provision for credit losses
   
160
 
   
4
   
 
1
 
   
 
164
   
 
(14
)
    
  
  
  
  
Net interest revenue after provision for credit losses
   
(8
)
   
152
   
 
136
 
   
 
144
   
 
291
 
Operating expense
                                     
Staff expense
   
458
 
   
476
   
 
366
 
   
 
934
   
 
734
 
Professional, legal and other purchased services
   
94
 
   
83
   
 
78
 
   
 
177
   
 
153
 
Net occupancy expense
   
60
 
   
63
   
 
53
 
   
 
123
   
 
105
 
Equipment expense
   
53
 
   
56
   
 
35
 
   
 
109
   
 
73
 
Amortization of goodwill
   
—
 
   
—
   
 
18
 
   
 
—
   
 
36
 
Amortization of intangible assets
   
4
 
   
3
   
 
1
 
   
 
7
   
 
3
 
Other expense
   
91
 
   
91
   
 
76
 
   
 
182
   
 
146
 
    
  
  
  
  
Total operating expense
   
760
 
   
772
   
 
627
 
   
 
1,532
   
 
1,250
 
    
  
  
  
  
Income
                                     
Income from continuing operations before income taxes
   
155
 
   
323
   
 
160
 
   
 
478
   
 
469
 
Provision for income taxes
   
49
 
   
112
   
 
58
 
   
 
161
   
 
168
 
    
  
  
  
  
Income from continuing operations
   
106
 
   
211
   
 
102
 
   
 
317
   
 
301
 
Discontinued operations:
                                     
Income from operations after tax
   
1
 
   
2
   
 
54
 
   
 
3
   
 
119
 
Net gain/loss on disposals after tax
   
2
 
   
3
   
 
(101
)
   
 
5
   
 
(101
)
    
  
  
  
  
Income from discontinued operations (net
of applicable tax expense (benefit) of $1,
$3, $(4), $4 and $35)
   
3
 
   
5
   
 
(47
)
   
 
8
   
 
18
 
    
  
  
  
  
Net income
   
$109
 
   
$216
   
$
55
 
   
$
325
   
 
$   319
 
    
  
  
  
  
Earnings per share
                                     
Continuing operations
                                     
Basic
   
$ .24
 
   
$ .48
   
$
.22
 
   
$
    .72
   
$
    .63
 
Diluted
   
$ .24
 
   
$ .47
   
$
.21
 
   
$
    .71
   
$
    .62
 
Net income
                                     
Basic
   
$ .25
 
   
$ .49
   
$
.12
 
   
$
    .74
   
$
    .67
 
Diluted
   
$ .25
 
   
$ .48
   
$
.12
 
   
$
    .73
   
$
    .66
 
Continuing operations—excluding goodwill
amortization in 2001 (b)
                                     
Basic
   
$ .24
 
   
$ .48
   
$
.25
 
   
$
    .72
   
$
    .70
 
Diluted
   
$ .24
 
   
$ .47
   
$
.25
 
   
$
    .71
   
$
    .69
 
(a)
 
In January 2002, the Corporation began to record customer expense reimbursements as revenue in accordance with a FASB staff announcement. The Corporation had historically reported expense reimbursements as a reduction of expenses. Prior period amounts have been reclassified.
(b)
 
See page 20 for additional information.

Mellon Reports Earnings
July 16, 2002
Page 23
 
 
CONDENSED CONSOLIDATED BALANCE SHEET
Mellon Financial Corporation
 
(dollar amounts in millions)
   
June 30, 2002
     
Dec. 31, 2001 (a)
     
June 30, 2001 (a)
  
Assets
                     
Cash and due from banks
   
$  2,813
 
   
$  3,177
 
   
$  2,571
 
Money market investments
   
2,277
 
   
5,191
 
   
2,836
 
Trading account securities
   
719
 
   
638
 
   
280
 
Securities available for sale
   
9,515
 
   
8,795
 
   
9,716
 
Investment securities (approximate fair value of $670, $786, and $911)
   
648
 
   
768
 
   
899
 
Loans
   
9,819
 
   
8,540
 
   
9,521
 
Reserve for loan losses
   
(242
)
   
(96
)
   
(217
)
    
  
  
Net loans
   
9,577
 
   
8,444
 
   
9,304
 
Premises and equipment
   
701
 
   
631
 
   
615
 
Goodwill
   
1,954
 
   
1,750
 
   
1,329
 
Other intangibles
   
102
 
   
97
 
   
22
 
Assets of discontinued operations
   
54
 
   
1,426
 
   
11,272
 
Other assets
   
5,506
 
   
4,646
 
   
4,628
 
    
  
  
Total assets
   
$33,866
 
   
$35,563
 
   
$43,472
 
    
  
  
Liabilities
                     
Deposits
   
$19,596
 
   
$20,715
 
   
$16,185
 
Short-term borrowings
   
2,447
 
   
1,546
 
   
1,821
 
Other liabilities
   
2,906
 
   
3,611
 
   
2,267
 
Notes and debentures (with original maturities over one year)
   
4,492
 
   
4,045
 
   
3,762
 
Trust-preferred securities
   
1,006
 
   
991
 
   
978
 
Liabilities of discontinued operations
   
148
 
   
1,173
 
   
15,016
 
    
  
  
Total liabilities
   
30,595
 
   
32,081
 
   
40,029
 
Shareholders’ equity
                     
Common stock—$.50 par value
Authorized—800,000,000 shares
Issued—588,661,920 shares
   
294
 
   
294
 
   
294
 
Additional paid-in capital
   
1,878
 
   
1,870
 
   
1,860
 
Retained earnings
   
5,268
 
   
5,087
 
   
4,290
 
Accumulated unrealized gain (loss), net of tax
   
56
 
   
30
 
   
(30
)
Treasury stock of 153,511,227; 142,153,053; and 118,632,116 shares at cost
   
(4,225
)
   
(3,799
)
   
(2,971
)
    
  
  
Total shareholders’ equity
   
3,271
 
   
3,482
 
   
3,443
 
    
  
  
Total liabilities and shareholders’ equity
   
$33,866
 
   
$35,563
 
   
$43,472
 
    
  
  
(a)
 
In the second quarter of 2002, the Corporation began to record the reserve for commercial loan commitments in a liability account. Previously, any such reserve was included in the reserve for loan losses. Prior period amounts have been reclassified.